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Исследование Insurance Banana Skins 2015

2.
CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org
C S F I / New York CSFI
The Centre for the Study of Financial Innovation is a non-profit think-tank, established in 1993
to look at future developments in the international financial field – particularly from the point of
view of practitioners. Its goals include identifying new areas of business, flagging areas of danger
and provoking a debate about key financial issues. The Centre has no ideological brief, beyond a
belief in open markets.
Published by
Centre for the Study of Financial Innovation (CSFI)
Email: info@csfi.org
Web: www.csfi.org
ISBN: 978-0-9926329-5-3
Printed in the United Kingdom by Heron Dawson & Sawyer
Trustees
Sir Brian Pearse (Chairman)
David Lascelles
Sir David Bell
Robin Monro-Davies
Sir Malcolm Williamson
Staff
Director – Andrew Hilton
Co-Director – Jane Fuller
Senior Fellow – David Lascelles
Programme Coordinator – Harry Atkinson
Governing Council
Sir Malcolm Williamson (Chairman)
Sir David Bell
Geoffrey Bell (NY)
Rudi Bogni
Philip Brown
Abdullah El-Kuwaiz
Prof Charles Goodhart
John Heimann (NY)
John Hitchins
Rene Karsenti
Henry Kaufman (NY)
Sir Andrew Large
David Lascelles
Robin Monro-Davies
John Plender
David Potter
Belinda Richards
Mark Robson
David Rule
Carol Sergeant
Sir Brian Williamson
Peter Wilson-Smith
CSFI publications can be purchased through our website www.csfi.org or by calling the
Centre on +44 (0) 20 7621 1056
In this document/material, “PwC” refers to the network of member firms of PricewaterhouseCoopers International
Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a
separate legal entity and does not act as agent of PWCIL or any other member firm. This document is for general
information purposes only, and should not be used as a substitute for consultation with professional advisors.

4.
C S F I / New York CSFI
CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 1
C S F I / NewYork CSFI
NUMBER ONE HUNDRED AND NINETEEN JULY 2015
Preface
This is the fifth ‘banana skins’ survey that we have carried out for the insurance industry – and it is one of the most
interesting.
The headline finding – that (too much) regulation is perceived as the top risk for the third consecutive year – is
important enough. There is a widespread fear within the industry and among observers that the volume of regulation
is swamping the industry; it costs too much, it takes up too much management time and it kills competition. But that
is far from the only risk – and it may not actually be the biggest. There is another risk ‘cluster’ that encompasses
macroeconomic risks (rated No. 2), interest rate risk (No. 3) and investment performance (No. 5), which suggests both
that the current low interest rate environment is hurting the industry and that (difficult as things are now) they could
get worse when interest rates rise.
On top of that, there is cyber risk (No. 4) – a new risk for us, but one which leads the pack as far as UK and US
respondents are concerned. Here, the chief concern is the vast quantity of data held in the ‘cloud’. Major breaches are
inevitable, and will do both financial and reputational damage.
On the positive side, there is a perception that the quality of management (and of risk management in particular) has
improved since 2013, and that ‘questionable’ business practices are less of a problem. The insurance industry itself
clearly feels that it is significantly better prepared to handle the problems it faces than it was at the time of the last
survey in 2013. Against that, however, the overall level of concern about risks within the industry is at its highest level
since the first survey in 2007.
In other words, there are several themes that one can draw from the data – some more encouraging than others. But
no one can gainsay the coverage of the survey. It gathered a record 806 responses from practitioners (life and non-
life, brokers and re-insurance) and observers in 54 countries, all of whom had to complete a detailed questionnaire
that included both a checklist of perceived risks and space for open-ended responses. The mix gives the Banana Skins
series its unique flavour.
As usual, the CSFI’s thanks go to the two authors – my colleague, David Lascelles (now the Centre’s senior fellow),
and Keyur Patel (who recently published a CSFI survey on the City’s professional bodies). I would also very much
like to thank the team at PwC with whom we worked. This is a CSFI report (and we take responsibility for it), but it is
only possible because of the generous support that we get from PwC. Long may that continue.
Andrew Hilton
Director
CSFI
This report was written by David Lascelles and Keyur Patel

5.
2 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org
C S F I / New York CSFI
Sponsor’s foreword
Welcome to Insurance Banana Skins 2015, a unique survey of the risks facing the industry, which has been produced by the
CSFI in association with PwC.
We’re delighted to be continuing our support for this initiative, which began with the publication of the first edition in 2007.
The Banana Skins reports provide valuable insights into the risk concerns at the top of the boardroom agenda and how these
perceptions change over time. Many of you will be comparing the industry-wide findings against your own assessment of
the current and emerging risk environment.
Cyber risk is the number one banana skin for participants from non-life businesses, as well as being high up the list for
reinsurers and life insurers. As more and more business moves to online and mobile channels, insurers’ vulnerabilities to
hacking, fraud and data compromise continue to mount. The risk is heightened by the volume of medical, financial and
other sensitive policyholder information held by insurers, which if compromised would lead to a loss of trust that would
be extremely difficult to restore. It’s vital that boards take the lead in evaluating and tackling cyber risk within their data
and systems infrastructure, rather than seeing this as solely a matter for IT. As the threats increase, we’re likely to see more
specialists in surveillance, encryption and biometric verification coming into the industry.At the same time, it’s important to
look at how cyber security can be strengthened without undermining the digitally-enabled ease and accessibility customers
now expect.
The leading banana skins for life insurers are interest rates and the macro-economy. These are also top ten risks for reinsurers
and non-life insurers. Low interest rates are making it difficult to generate competitive returns for policyholders. Potentially
higher capital charges for guaranteed products could drive up costs still further and erode returns in many markets. Tight
cost control is clearly crucial in being able to sustain margins in low growth markets. We’re also seeing moves towards more
dynamic investment strategies as insurers look to boost asset returns, while remaining within reasonable risk tolerances.
At the heart of this approach is a better understanding of the interdependencies between capital demands and asset yields,
enabling insurers to capitalise on market opportunities while curbing capital costs.
Regulation is once again a prominent Banana Skin across all segments of the industry. The latest wave of regulatory change
is not only creating huge operational disruption, but also calling into question longstanding strategic certainties. Costs, prices
and returns could soon become unsustainable if the changes aren’t managed effectively. This in turn requires a mechanism
capable of looking beyond basic operational compliance at how new regulation will affect the strategy and structure of the
organisation and using this assessment to develop a clear and coherent company-wide response.
Regulation is just one of the disruptive shifts facing insurers as they grapple with a perfect storm that includes the impact of
digital technology, changing customer expectations and competition from new entrants. The transformational challenges this
presents are reflected in the fact that change management is a top five Banana Skin for life, non-life and broking businesses,
though notably not reinsurers. More than just new systems and processes, successful execution demands a clear sense of
how culture, organisation and talent strategies will need to change and how this can be achieved. Many of these disruptive
shifts echo the social, technological, environmental, economic and political (STEEP) mega-trends PwC has identified in
its Insurance 2020 reports (www.pwc.com/insurance/future-of-insurance). Insurers are using Insurance 2020 to help them
judge the implications of these trends for their organisations and determine the strategies needed to respond.
We would like to thank all the participants in the survey for sharing their valuable insights and thank the CSFI for the
richness of insight and perceptive comment in this report. The long-term prospects for insurers are positive as people around
the world live longer and have more wealth to protect. The ability to identify and manage emerging as well as familiar risks
will be one of the key differentiators for success.
We hope that you find Insurance Banana Skins 2015 useful and thought-provoking. If you have any feedback or would like
to discuss any of the issues raised in more detail, please do not hesitate to contact us.
Stephen O’Hearn Mark Train
Global Insurance Leader, PwC Global Insurance Risk Leader, PwC
Tel: +41 446 280 188 Tel: +44 (0)207 804 6279
Email: stephen.ohearn@ch.pwc.com Email: mark.train@uk.pwc.com
LinkedIn: ch.linkedin.com/in/stephenohearn1

6.
C S F I / New York CSFI
CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 3
About this survey
Insurance Banana Skins 2015 surveys the risks facing the insurance industry in mid-
2015, and identifies those that appear most urgent to insurance practitioners and
close observers of the insurance scene around the world.
The report, which updates previous surveys in 2007, 2009, 2011 and 2013, was
conducted in March and April 2015, and is based on 806 responses from 54
countries.
The questionnaire (reproduced in the Appendix) was in three parts. In the first,
respondents were asked to describe, in their own words, their main concerns about
the insurance sector over the next 2-3 years. In the second, they were asked to rate a
list of potential “Banana Skins” or risks. In the third, they were asked to rate the
preparedness of insurance institutions to handle the risks they saw. This report ranks
and analyses each Banana Skin individually.
Replies were confidential, but respondents could choose to be identified.
The breakdown of responses by type of respondent was
Nearly two thirds of the respondents were from the primary insurance industry. The
remainder were from the reinsurance and broking sectors, and non-practitioners such
as regulators, consultants, analysts and other professional service providers.
Broking/
intermediary
5%
Life
27%
Non-life
34%
Reinsurance
6%
Observers
28%

8.
C S F I / New York CSFI
CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 5
Summary
This survey identifies the risks, or "Banana Skins", facing the global insurance
industry in the first half of 2015, as seen by a sample of 806 practitioners and close
observers from 54 countries. It comes at a time when the world economy is showing
moderate, if uneven, signs of growth, but the industry itself faces a difficult
investment climate, a heavy regulatory agenda, and the pressures of deep structural
and technological change.
Significantly, the overall tone of the
responses this year is more negative
than the previous survey in 2013, as
measured by our Insurance Banana
Skins Index (the “anxiety index”),
despite the resumption of global growth.
The average score given by respondents
to our list of 25 risks rose to its highest
level since we began the series in 2007,
reversing the downward trend we saw in
2013 in the aftermath of the global
financial crisis.
This pessimism is due primarily to
pressures from the economic and public
environments (i.e. macro-economy,
regulation, political), signalling that the
sector considers its greatest risks to lie
outside its direct control.
Chief among the external risks is regulation, which tops the survey for the third
year running. Concern is driven by the quantity of regulatory reform at all levels, in
particular the EU’s Solvency 2 Directive. The fear is that these initiatives are
loading the industry with costs, and distracting management from the task of
running profitable businesses, as well as heightening compliance risk.
Worries about regulatory pressure are sharpened by the difficult economic
environment in which the industry currently finds itself, in particular the persistence
of low interest rates (No. 3) which is depressing investment performance (No. 5)
and affecting bottom line results. Savings products with guaranteed returns (No.
7) remain a concern for the life side of the business. Respondents generally also see
low yields driving a strong increase in competition as insurers seek to boost their
"top line" revenues, and outsiders such as hedge funds chase business with new
capital. The availability of capital at No. 22 is clearly not seen to be a problem:
rather the opposite, it is in surplus.
Respondents were gloomy about the outlook for the macro-economy (No. 2),
largely because of uncertainty about the future of quantitative easing, as well as the
cooling of emerging market growth and the continuing crisis in the eurozone.
Market conditions (No.13) in the non-life insurance market have a cycle of their
own, and are currently depressed because of surplus capacity. Respondents gave a
mixed view of the outlook, some seeing rates hardening, others commenting that the
low level of major claims and plentiful capital would keep conditions soft.
0
1
2
3
4
5
2007 2009 2011 2013 2015
Insurance Banana Skins Index
Avg score Top score
The top scores were: 2007: Regulation
2009: Investment
performance
2011: Regulation
2013: Regulation
2015: Regulation
The tone of the
response is more
negative this year
External pressures
are mounting

9.
6 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org
C S F I / New York CSFI
Structural and technological change
in the industry ranks high on the risk
list as pressures for consolidation
grow, and digital techniques become
more widespread. Concern about the
industry's ability to manage change
has risen sharply (from No.15 in the
2013 survey to No. 6).
The top concern on this front is cyber
risk (No. 4) which we rank for the
first time this year. As an industry
that handles large amounts of other
people's money and personal data,
insurance is vulnerable to attack.
Cyber is also an underwriting risk
which has yet to be fully scoped.
The impact of change in the areas of
distribution and client interface has
also risen as a concern (up from No.
11 to No. 8). Much of the industry is
struggling to keep pace with new
technologies, and incumbents feel
threatened by new entrants
unburdened by legacy systems.
Technology is a common theme in
virtually all the major changes facing
the industry.
Among the large underwriting risks,
natural catastrophes (No. 9) are
considered to be the most formidable,
though they have slipped from the
high position they occupied in the
wake of the bad earthquakes that
coincided with the last survey, but
may now be underpriced as risks. Climate change (No. 19), terrorism (No. 23) and
pollution/contamination (No. 24) are seen to be low order.
An area of declining risk is the governance and management of insurance
companies. These were seen as high-level risks during the financial crisis, but have
fallen sharply in this survey. Respondents reported big improvements, partly as a
result of initiatives from the industry itself, but also under strong regulatory
pressure. Concerns remain, however, particularly over the quality of human talent
in the industry (up from No. 19 to No. 15), and its ability to attract good people.
Another area of declining risk is reputation (down from No. 14 to No. 18) as the
industry (and the regulators) get to grips with bad business practices such as mis-
selling (down from No. 4 to No. 11). However, respondents said that much remains
to be done to improve the industry's image, for example in claims handling.
Insurance Banana Skins 2015
(2013 ranking in brackets)
1 Regulation (1)
2 Macro-economy (3)
3 Interest rates (-)
4 Cyber risk (-)
5 Investment performance (2)
6 Change management (15)
7 Guaranteed products (6)
8 Distribution channels (11)
9 Natural catastrophes (5)
10 Quality of risk management (7)
11 Business practices (4)
12 Quality of management (8)
13 Market conditions (-)
14 Long tail liabilities (9)
15 Human talent (19)
16 Political interference (1
17 Product development (20)
18 Reputation (14)
19 Climate change (18)
20 Social change (-)
21 Corporate governance (17)
22 Capital availability (16)
23 Terrorism (27)
24 Pollution/contamination (26)
25 Complex instruments (23)
0)
Regulation is
the top risk for the
third year running

10.
C S F I / New York CSFI
CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 7
Type of respondent
The survey shows divergences between the concerns of different types of
respondent. The ranking of regulation, for example, was the No. 3 concern for both
the life and non-life sides. However it was No. 1 for observers (consultants, analysts,
academics etc.), suggesting that this risk is not just an industry bugbear. The life
industry was particularly concerned about low interest rates, investment
performance and the economic outlook, while the non-life side and the broking
community focused on underwriting risk: cyber, catastrophe, and climate change.
The reinsurance industry's main concern was excess market capacity.
Geography
A breakdown of responses by region also showed different priorities. The strongest
common concern between Europe and North America was interest rate risk and the
future of QE. The two regions also focused on the macro-economic outlook and on
regulatory risk. Cyber risk was a widespread geographic concern, appearing in the
Top Ten of all major regions except Latin America. Otherwise, risk priorities were
very localised.
Preparedness
Respondents were asked how well prepared they thought the insurance industry was
to handle the risks they identified. On a scale of 1 (poorly) to 5 (well) they gave an
average response of 3.20, a sharp rise on the previous survey's 2.95, suggesting that
risk management is seen to be improving, though there are still concerns as to
whether this trend will stand the test of a difficult business environment.
History. The results of past Insurance Banana Skins surveys provide a useful guide
to evolving risk perceptions in the industry. A summary of past results can be found
on p. 33.
Big movers
This year’s survey has produced dramatic changes in the ranking of some
Banana Skins, reflecting shifting perceptions of risk in a difficult market. Here
are some of the big movers.
UP
Interest rates (new entrant). Persistent low yields are hurting performance.
Cyber risk (new entrant). Vulnerability of the industry to attack and
underwriting risk.
Change management. Can the industry handle its huge change agenda?
Human talent. The industry is insufficiently attractive to young people.
DOWN
Capital availability. Capacity is in surplus.
Corporate governance, quality of management. Insurance companies are now
better run.
Reputation, business practices. Industry conduct and image are improving.
Cyber risk is a
dramatic new
entrant

11.
8 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org
C S F I / New York CSFI
Who said what
A breakdown of the results by respondent type and region shows a strong common
concern with the negative impact of new regulation on the insurance business,
against a background of difficult and fast-changing industry conditions. However
there are also striking sectoral and geographical differences.
Life insurance
1 Interest rates The life sector’s main concerns are linked to
the economic environment, particularly the
persistence of low interest rates and their
impact on savings products (such as
guaranteed annuities) and investment returns.
Main concerns about the industry are around
the growth of cyber risk and changes
affecting the structure of the industry, such as
methods of distribution, competition and
pricing. Concern about political interference
centres on issues such as reform of pensions
and health care.
2 Macro-economy
3 Regulation
4 Guaranteed products
5 Investment performance
6 Cyber risk
7 Distribution channels
8 Change management
9 Business practices
10 Political interference
Non-life
1 Cyber risk The property and casualty side of the
business was, as might be expected,
primarily concerned with underwriting risk,
especially the growth of cyber risk and the
continuation of high levels of catastrophe
risk. Climate change also featured in the top
ten. As with other sectors, the weight of new
regulation was a strong concern, as was
structural and technological change in the
business, particularly distribution. The sector
was less concerned than the life side with
investment and yield issues.
2 Natural catastrophes
3 Regulation
4 Change management
5 Macro-economy
6 Interest rates
7 Distribution channels
8 Quality of management
9 Climate change
10 Investment performance
Reinsurance
1 Market conditions The reinsurance sector's main concern
centres on the soft conditions created by
excess capacity and "new" types of capital,
e.g. hedge funds, and what many see as
onerous regulation of the market. The lack of
a robust and well-defined market for cyber
risk is another top concern. Interest rates rank
high because low yields affect investment
returns; so do natural catastrophes because
ultimately the reinsurers bear the brunt. The
quality of risk management in insurance
companies is a further worry.
2 Regulation
3 Cyber risk
4 Interest rates
5 Natural catastrophes
6 Distribution channels
7 Guaranteed products
8 Investment performance
9 Quality of risk management
10 Macro-economy
Common concerns
about regulation,
economic trends
and industry
change

12.
C S F I / New York CSFI
CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 9
Brokers/intermediaries
1 Change management Changes to the structure of the industry are
at the head of brokers' concerns, particularly
issues linked to the client interface:
distribution and major insurance risks such
as cyber, climate change and natural
catastrophes. The quality of management in
insurance companies is another high
concern. Brokers are less affected than
primary insurers by macro-economic issues
such as interest rates, though they share the
industry's broader concern with the quantity
of new regulation, particularly in the area of
conduct of business.
2 Quality of management
3 Distribution channels
4 Quality of risk management
5 Cyber risk
6 Regulation
7 Climate change
8 Macro-economy
9 Natural catastrophes
10 Investment performance
Observers
1 Regulation It is significant that observers (i.e. non-
practitioners) place regulation at the top of
their concerns because this suggests that the
perception of regulatory excess is not
merely held by the industry. Observers were
also concerned about the economic
environment for insurance, particularly low
interest rates and the effect this has on
investment performance. They focused on
the need for the industry to adapt to change
and to strengthen its business practices.
2 Interest rates
3 Macro-economy
4 Guaranteed products
5 Investment performance
6 Cyber risk
7 Change management
8 Distribution channels
9 Business practices
10 Natural catastrophes
North America and Bermuda
1 Cyber risk Cyber attacks and data breaches were seen
as especially urgent in North America and
Bermuda, topping the rankings by some
margin. Other industry risks also ranked
much higher than the global average,
notably guaranteed products and market
conditions. Otherwise, the main concerns
were to do with regulation and the macro-
economic environment, with a particular
focus on the impact of low interest rates on
profitability. On the other hand, governance
and underwriting risks were largely seen as
lower order.
2 Regulation
3 Interest rates
4 Guaranteed products
5 Macro-economy
6 Market conditions
7 Investment performance
8 Change management
9 Distribution channels
10 Natural catastrophes
Regulation is
the top risk seen
by industry
outsiders

13.
10 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org
C S F I / New York CSFI
Europe
1 Interest rates More than half of the responses this year
came from Europe. The persistently low
interest rate environment was seen as a more
severe threat than in any other region, leading
to particular concerns about guaranteed
products and investment performance.
Elsewhere, the major risks in Europe were
largely in line with the global response:
overbearing regulatory requirements,
especially the EU’s Solvency 2 Directive,
and industry risks dominated by insurers’
difficulties in adapting to change, notably in
technology.
2 Regulation
3 Guaranteed products
4 Macro-economy
5 Cyber risk
6 Investment performance
7 Change management
8 Distribution channels
9 Natural catastrophes
10 Business practices
Far East/Pacific*
1 Change management The top risks in the Far East/Pacific region
were about keeping up with technological
change in the industry, from the growing
sophistication of cyber-crime to emerging
distribution channels that are creating
competition from new entrants. This was also
seen as having an impact on the industry’s
ability to attract and retain the right talent. On
the other hand, respondents showed more
optimism about the macro-economic
environment than any other region we
surveyed, and were slightly less wary of
regulation.
2 Cyber risk
3 Distribution channels
4 Human talent
5 Regulation
6 Interest rates
7 Natural catastrophes
8 Investment performance
9 Macro-economy
10 Quality of risk management
* Australia, China, Hong Kong, Japan, Malaysia, New Zealand, Singapore, South Korea,
Taiwan, Vietnam
Latin America
1 Regulation Public environment risks were seen as more
urgent in Latin America than any other
region: concerns about the volume and
complexity of new regulation topped the
rankings by a distance, while political
interference also breached the top 10.
Elsewhere there was considerable variance
from the global results. Institutional risks –
especially the quality of risk management and
business practices – were seen to be higher,
and there were specific concerns about
climate change and capital availability. On
the other hand, there was less anxiety about
the industry’s ability to respond to change.
2 Macro-economy
3 Quality of risk management
4 Investment performance
5 Natural catastrophes
6 Interest rates
7 Capital availability
8 Business practices
9 Climate change
10 Political interference
Different
geographic risk
priorities

14.
C S F I / New York CSFI
CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 11
Preparedness
We asked respondents how well prepared they thought the industry was to handle
the risks they identified.
On a scale of 1 (poorly) to 5 (well), they gave an average response of 3.20, well up
on 2.95 last time. Respondents pointed to a higher level of risk awareness and
management in the industry, particularly among well-resourced firms. Where there
are concerns, these centre on the industry's ability to manage its huge change
agenda, and the pace of regulatory reform.
Views on preparedness
UK, consultant: “The weakness is that for some of the market and financial risks,
it is hard to see preventative or protective measures that do not involve a
planned contraction of business.”
Japan, life: “I believe insurers are coming around to addressing many of these
risks, but they seem slower in responding than what I see from other industries.”
Greece, life: “The bigger players have the structure, knowledge and resources to
be adequately prepared while the lower size insurers are less likely to be able to
manage the competition.”
USA, consultant: “The principal weakness of the industry is its determination to
see the universe of risk transfer as it once was, not as it is becoming.”
Netherlands, non-life: “In general, insurers are used to managing risk based on
developments in the past. They should be more forward looking. Think the
unthinkable.”
Luxembourg, reinsurance: “Could do better; the industry really needs to start
thinking outside the box. BUT, at the same time, over-regulation stifles
creativity.”
Preparedness for
risk is improving

15.
12 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org
C S F I / New York CSFI
1. Regulation (1)
The rising tide of financial regulation is the greatest risk facing the global insurance
industry according to respondents to the latest Banana Skins survey. This is the third
year running that the survey has produced this result, underlining the scale of
regulatory change that is taking place in the insurance world.
The reasons are clear: while the benefits of stronger regulation are acknowledged,
the sheer quantity of new regulatory initiatives is seen to be swamping the industry
with costs and distractions, and creating a whole new class of risk: regulatory
compliance. This was recognised by an insurance supervisor who said: "I guess from
an industry perspective the main risk in respect of regulations is the speed at which
regulation changes. As a supervisor my main concern is whether the industry will be
able to effect the proposed regulation in time."
Regulatory risk is seen to take many
forms.
Cost. The high cost of capital
requirements and compliance is a major
concern. This is seen to be hurting
profitability and growth, and
discouraging innovation in an industry
whose traditional business models are
coming under strain.
Jaco van der Sandt, finance director of the Mutual & Federal Insurance Company in
South Africa, said: “I do not see much wrong with the principles, but worry about
the unintended consequences of some of the proposals. An unanswered question in
my mind is whether a healthy and effective regulator needs all the new rules to
better protect the consumer and financial markets.” The CEO of a life company in
Luxembourg said that “European consumer protection goes too far as it assumes
people cannot read and understand anymore”.
A related issue is management distraction. One risk officer in Switzerland said:
“Regulation is time-consuming and distracts talent from helping the industry be
more innovative”. Some respondents said that regulation was now so complex that
there was a risk it could not be fully understood which meant, as one said, “it would
not make the system safer”.
Competition. The new regulations could have a structural impact on the insurance
industry. Many respondents said they would drive out smaller insurers and reduce
diversity. Another concern was “gold-plating”: national regulators toughening up
international standards and putting local players at a competitive disadvantage.
These concerns were particularly stressed by respondents from the UK and Ireland.
Malcolm Newman, managing director of SCOR based in the UK, said he was
concerned that implementation of Solvency 2 “will be done in a way that damages
the competitive landscape in Europe compared to other insurance markets like
Zurich/Bermuda/Singapore.”
Quality of regulation. The quality of insurance regulation varies widely. A frequent
concern was the apparent desire of regulators to apply to insurers the same
toughened standards as banks, even though insurers contributed little to the recent
A sound regulatory environment is
absolutely essential. At the same
time, over-regulation potentially
strangles perfectly good and sound
insurers from conducting good and
sound business.
Managing director
Non-life company, Singapore
Regulation is
seen to be
distracting
management from
running sound
businesses

16.
C S F I / New York CSFI
CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 13
crisis. One said regulation was “based on an assumption of guilt rather than
engaging to address concerns with past industry practice”.
Global initiatives. A strong focus of concern was the Solvency 2 Directive, the
EU’s ambitious initiative to set capital rules for the insurance industry, due for
implementation next year. Although Solvency 2 only affects the EU market directly,
other jurisdictions are going through similar exercises, or modelling their regulations
on Solvency 2 under the aegis of the International Association of Insurance
Supervisors (IAIS). Concerns exist about
the capital requirements themselves and
the method of implementation. The chief
financial officer of a Canadian non-life
company reflected a frequently voiced
concern when he saw “onerous capital
requirements deflating industry
performance and investor appetite”.
Similar concerns were expressed about
IFRS 4, the international financial
reporting standard, now undergoing
expansion in Phase II. The chief financial
officer of a Canadian non-life company feared that “the pending IFRS 4
requirements [...] will materially impact the industry with little increased end user
benefit.” A respondent from South Korea said: “IFRS 4 Phase 2 will change
fundamentally how insurers look at their business performance, but insurers do not
seem to fully understand it, and they are hesitating to analyse the impact and be
prepared in advance.”
Consistency of implementation was another concern. Wayne Snow, group chief
risk officer at the Phoenix Group in the UK, worried that “inconsistencies in the
implementation of Solvency 2 across Europe will inevitably emerge, influencing
competitiveness and creating the potential for regulatory arbitrage.” Adrian
Rossignolo, actuarial manager at Provincia Vida in Argentina, said that “the lack of
coordination between regulators may be seen as a potential menace to the insurance
sector.”
Non-insurers worry most. While many of
these concerns might be discounted as a litany
of complaint by an industry which feels put-
upon, the scoring showed that concern was
actually highest among respondents who were
not direct practitioners in the industry but
observers (see box).
But it wasn’t all bad. A number of
respondents said that while increased
regulation was a burden, it did produce stronger insurance companies and
encouraged the growth of a risk culture. The group executive of a Nigerian insurer
said that "insurers may suffer from lowered returns, but they can only grow stronger
as a result of these regulations". In New Zealand, the chief financial officer of a
large broking firm said that in his country’s case “the strengthening of solvency and
prudential supervision of insurers has been a positive”.
Ranking of regulation
as a risk
Observers (e.g. consultants,
analysts, academics)
1
Reinsurance 2
Non-life 3
Life 3
Broking/intermediary 6
Every time regulators implement
new capital requirements, there is a
strong chance they will overdo it,
for two reasons: they do not have
enough experience and they are
always conservative.
Benildo Costa
Finance director
JM&A, Brazil
Doubts about the
net benefits of
Solvency 2

17.
14 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org
C S F I / New York CSFI
2. Macro-economy (3)
The global economic outlook is not encouraging, according to the majority of
respondents to the survey. This will affect the insurance industry through low
growth, continued low interest rates and difficult market conditions.
A Canadian respondent summed it up: "The global economy is still hobbling along.
The EU could encounter major disruptions with global economic effects. Further,
major economies such as Russia and China are showing signs of stress."
At a local level, there were also gloomy reports from countries as diverse as Mexico,
Peru, Brazil, Argentina, South Africa, Malaysia, Japan, India, Australia, Vietnam
and members of the eurozone. Richard van der Hart, director of Klaverblad
Verzekeringen in the Netherlands, said: "Little economic growth, so little growth
prospect for insurers!" The senior manager of a South Korean life company was
concerned that slack monetary policy would produce unsustainable expansion
followed by a global recession.
Respondents noted some of the specific consequences of low economic growth for
the industry: higher lapse rates, increased fraudulent claims, and general
vulnerability of insurance to household budgets as a discretionary spend. The
intensification of competition was another concern. A Dutch insurance executive
said that "We are no longer in a financial crises but our world has become much
more competitive."
High among respondents' concerns was quantitative easing, both as to its effect of
artificially boosting asset prices, and the prospects for its unwinding. Henrik Olejasz
Larsen, chief investment officer at Sampension in Denmark, said that “current low
yields support the prices of all asset classes, and these will be vulnerable to e.g.
inflation”, while the chief risk officer at a Swiss reinsurance company said that
“current central bank policy has eliminated most of the information contained in risk
prices”.
Some feared that a "disorderly" unwinding would be damaging to the industry, and
might even precipitate a new financial crisis. On the other hand, inflationary
pressures could start building up, requiring interest rates to be raised. Bryan Joseph,
an insurance partner at PwC in the UK, said: "Inflation represents a significant risk,
especially where there are long tailed exposures and annuity type claims."
There were a few gleams of light: respondents from the US, Canada, the UK and
Spain, countries showing stronger growth, were more optimistic. Marcos Rodriguez
Silva, head of operations and business services at Generali in Spain, said: "It appears
that the economy is recovering from recession, which should favour the expansion
of the insurance business. In this sense the impact of the macro-economy should
start being positive". The director of a large US life company said this was "not an
issue in the US. I don't see a deflationary or inflationary risk."
Global economy
“hobbling along”

18.
C S F I / New York CSFI
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The persistent low interest rate environment is a major source of risk for insurance
companies and could accelerate changes in the structure of the industry.
Low rates affect insurers in many ways: by driving down investment yields, by
marooning products with guaranteed returns, by reducing the value of capital and by
undermining traditional business models. However, pressure on profitability was the
concern most frequently mentioned by respondents. Investment returns are down at
a time when the market is already seeing premiums depressed by overcapacity. A
UK insurance consultant said: "Many business plans have been prepared on the
basis of a 2-3% real return. This is currently zero or negative."
Interest rate risk affects life companies most directly because their products are
effectively a form of saving. The chief investment officer at a large Japanese life
company said that "Life insurers continue to be hurt by low yields and, now,
tightening spreads. Rate increases are likely to be slow."
The temptation for insurance companies is to take greater investment risk in order to
raise returns. David Perez Renovales, chief financial officer at Línea Directa
Aseguradora in Spain, said this could lead to excessive risk and a bubble in certain
classes of assets, "all [because of] pressure to seek additional returns in order to
remain competitive on price, offset higher combined ratios, and offer life products
[that are] minimally attractive".
Whether traditional business models,
particularly on the life side, can survive in
this environment is a question a number of
respondents raised. An actuary at one of
the large UK life companies said that low
rates “affect the viability of products,
customer behaviour, capital positions, etc."
while Dr Bruce Porteous, investment
solutions director at Standard Life
Investments, was concerned about "the
reluctance of both insurers and supervisors to face up to economic realities and
change."
A small number of respondents said that low rates were having a healthy effect by
forcing insurance companies to focus on what they are supposed to be good at:
underwriting risk. Others also said that insurance companies should be able to
protect themselves against low rates. The chief financial officer of a non-life group
in Canada said: “Insurers can cope. They can hedge; they need good asset and
liability management strategies.”
No clear consensus emerged from the responses about the likely path of interest
rates. Many respondents assumed the next move would be up, which would cause
some short term pain as bond values adjusted, but would lead to higher returns in the
long term. But a Dutch insurance company director said that "rates are very low at
this moment, thanks to Mr. Draghi. We don't expect any change in the coming two
to three years", and an actuary at one of the large US life companies commented:
"We continue to assume interest rates are going up while we watch them go down."
The persistent low interest rate
environment will continue
to limit the industry’s ability to
provide competitive savings and
retirement products which are
important to customers.
Kenneth Rappold
CFO Asia, Aviva, Singapore
Low interest rates
now a major
source of risk
3. Interest rates (new entrant)

19.
16 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org
C S F I / New York CSFI
The most striking new theme to emerge from this survey is the high level of anxiety
about cyber risk, specifically software failure and data security breaches. The risk is
ranked No. 1 in North America, Africa and the UK, and No. 2 in the Far East Pacific
region. By sector it is No. 1 among non-life respondents and No. 2 in re-insurance
and No. 6 for life.
The chief concern is the security of the ever growing volumes of data that insurers
hold in cloud-based storage systems. For many, major breaches are inevitable; the
question is how much damage they will cause. The director of risk management at a
non-life insurance company in Canada said: “Insurers are prime targets to be
victimized given the richness of data – credit card information, medical information,
and other underwriting information. It's not a matter of if but when it will happen”.
By demanding that insurers store more and more details about their clients,
regulation could exacerbate this.
The industry is vulnerable to the growing sophistication of cyber criminals and the
constantly changing nature of the threat. “Activity and technology increases all the
time and security is always one step behind. Insurance companies are a likely
target,” said Timo Ahvonen, chief development officer of Fennia in Finland.
The task is made more difficult by the growing number of attacks, only a fraction of
which need to get through to cause serious disruption. The chief financial officer of
a non-life company in Australia said cyber risk was “a major threat. We repel more
than 20 serious attacks every day. Half of these we suspect are state-sponsored
attacks”.
A global problem
Urgent concerns about cyber risk could be found in every region and sector we
surveyed. A few examples:
New Zealand, reinsurance: “Cyber attacks are a threat to all businesses.
Insurers may be at the top of the target list in respect of perceived or actual
claim experiences”.
South Africa, life: “We will be victims. The question is only how big the cost
will be”.
UK, consultant: “There are two types of company – those hacked and those
that will be hacked. There is no amount of security in place that prevents
attacks 100%.”
Bermuda, non-life and life: “Every business in every industry is at risk.”
Portugal, broking: “Cyber issues must be on the top of priorities for insurers.”
Turkey, non-life: “Cyber attacks and information security are critical topics in
the current environment. Most of the companies in the market are not
compliant with international security standards.”
High level of
anxiety about
cyber risk
4. Cyber risk (new entrant)

20.
C S F I / New York CSFI
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The impact of a successful attack could be very significant, from the costs of
additional security to service disruptions, the loss of intellectual property or
sensitive information, and compensation claims or fines. The biggest risk of all
could be a loss of trust from customers. “We all dread the call that data has been
compromised and has gone outside the firewall. It’s a huge reputational risk”, said
the chief financial officer of a large non-life insurance company in France. Firms
may not even be in a position to alert their customers immediately after a breach.
Not everyone was so pessimistic, however. A respondent from the life insurance
industry in Denmark said: “This is a risk, but the slow pace of transactions in the
insurance industry makes it less vulnerable than many others”. Some saw the
banking industry as a more likely target. A respondent in Switzerland said: “The risk
is probably smaller than assumed, because cyber risk insurers bloat it through the
media”.
While this Banana Skin was specifically about the insurance industry being the
target of cyber attack, a broader point was about the underwriting risk. “Cyber
insurance is such an unknown and many insurers may be opening themselves up to
potentially horrific losses”, said a consultant in New Zealand. An actuary in
Bermuda pointed out that existing insurance policies which do not specifically
exclude (or do not mention) cyber attacks may be vulnerable to hefty claims if a
major incident occurs.
5. Investment performance (2)
Seven years of low investment performance are putting pressure on an industry
which has become dependent on investment earnings to make up for declining
insurance business returns. The concern is not just about low yields and a shortage
of safe, liquid assets, but the pressure on the industry to compensate for this by
taking on more risk in new markets. This Banana Skin is particularly sensitive for
the life industry, which ranked it No. 5, vs No. 8 for reinsurance and No. 10 for non-
life.
Raj Singh, group chief risk officer, Standard Life Group in the UK, said that “low
interest rates and challenges in finding quality assets with strong risk adjusted
returns and higher capital calibrations will maintain pressure on investment
performance in some parts of the insurance industry”, and a chief risk officer in
Bermuda was concerned by "a belief that everyone can successfully follow an
alternative investment strategy (and succeed)".
Many respondents noted the tendency among insurers to take on higher risk to raise
returns or to become more aggressive about market share - engaging in "bad
behaviour", as one put it. The group chief corporate actuary at a life company in
Hong Kong saw a trend towards “riskier investment oriented products”.
However the level of concern has declined since the last survey, reflecting the better
performance of some markets, particularly equity (though some feared there would
be a correction), and stronger action by insurance companies on the asset/liability
front. The chief financial officer of a large Canadian life company said: “We will, no
doubt, be harmed. But our assets and liabilities are matched such that the risk is
largely mitigated (other than an all-out Armageddon, such as the government of
Canada defaulting on debt)”. Willem Smith, managing director, Hollard Personal
Lines in South Africa, said that "good governance and prudent investment strategies
are common".
Poor investment
performance is
adding to risk

21.
18 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org
C S F I / New York CSFI
6. Change management (15)
There was a big jump in the ranking of this Banana Skin, driven by a perception that
the pace and nature of change in the insurance industry are reaching new levels and
challenging traditional models and practices. Geographically, this was the No. 1 risk
in the Far East/Pacific, No. 7 in Europe and No. 8 in North America. By sector, it
was No. 1 among brokers, No. 4 among non-life insurers and No. 8 among life
insurers.
“It feels like we may be on the precipice of change, where new technologies (e.g.
big data, wearables, automation) could be game changers,” said the chief financial
officer of a life insurance company in Canada. “There is so much being developed
that it is difficult to predict which particular change will be the one to be the most
concerned about”.
Technology was widely seen as the driving force behind new markets, changing
customer demand, and facilitating competition from non-traditional entrants. In New
Zealand, Gary Dransfield, chief executive officer of non-life firm Vero Insurance,
said: “There is a high risk of disruptive technology and/or business models
impacting insurer profitability, and ultimately relevance”, while a life respondent
warned: “slow adopters of technology can lose scale very quickly”.
The need for insurers to respond to change is nothing new, but many respondents
saw the current challenges demanding special urgency. “Insurers typically adapt to
changes (regulatory, client needs, etc.), but with delay. In the new tech era, such
delay simply can’t exist, and that's new to insurers,” said a respondent in France.
The chief financial officer of a non-life company in Belgium said: “The majority of
insurers have to live with the 'heritage' of the past and a fragmented ICT landscape.
The world is evolving faster than the response time of insurers”.
Particularly in the broking industry, a concern was that the commoditisation of
commercial products is “making it a market for price buyers, not quality buyers”,
and increasingly resulting in disintermediation. That is opening the door to non-
traditional entrants. These might be “technology giants with the balance sheet capital
and willingness to provide risk transfer solutions for clients themselves”, said a
respondent in the UK, or “consumer-based industries which are driven into
insurance because of the stagnation in their own lines of business”, said another
from South Africa. In the words of a non-life respondent in Canada: “Customers
will not care that we have legacy decisions and a very robust regulatory
environment. They will expect customer service in the manner that they receive
from their banks or even [the technology company] Apple”.
Some, however, expressed more optimism about these risks. A life insurance
respondent in Japan said: “There is some risk, but the impact of digital is over-rated,
and the death of face-to-face exaggerated”. Others focussed on the business
opportunities for insurers that can adapt to new markets, while the chief risk officer
of a non-life insurer said: “The overall impact on the end consumer will be positive
[in terms of] lower prices, faster service, and ease of doing business”.
Big challenges on
the front of
industry change

22.
C S F I / New York CSFI
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7. Guaranteed products (6)
The extended period of low interest rates – now much longer than expected – creates
a particular problem for insurance companies who offered savings products with
guaranteed returns back in the days when interest rates were high. Many of these are
now loss-making because insurers cannot earn high enough investment returns to
fund the liability. Concern is highest in the life sector (No. 4) where most of the
exposure lies, compared to non-life (No. 13).
A Swiss life insurance executive said:
"This will kill certain insurers - unless their
shareholders inject heavy capital (which is
not certain)” and the chief financial officer
of a French insurer described it as “a
massive risk”.
Interestingly, concern about these products
remains close to the level of the last survey
even though capital requirements have been
strengthened, and provisions made against
loss in the meantime. Some commentators
thought that providers were still being
tempted to offer guaranteed savings
products to maintain their share of the
market. A UK consultant said this risk
varies by region, “but how can German
insurers still be writing policies with 3%
guarantees?” Some made the point that the
true losses could still take years to materialise.
But others felt the risk was being exaggerated. This has become “the new normal”
according to one of them, while another said that “most of the downside risk is now
already adequately reserved for”, and regulators were on the case.
8. Distribution channels (11)
Concern is high that insurers are not making the best use of new distribution
channels to reach their clients, reflecting a wider feeling that the industry has been
slow to keep pace with new technology. This was the No. 3 risk in the Far East
Pacific region, and No. 4 in Africa and the UK. “The digital revolution has the
potential to change the framework for doing business”, said the chief actuary at a
life insurance company in New Zealand.
A repeated point was that traditional intermediary channels were standing in the way
of change. Luc Bergeron, chief actuary at Humania Assurance in Canada, said:
“Currently the average age of the insurance broker is around 57 years old. The new
generation is more oriented to the internet and direct insurance. Adjustment will be
required for a large part of traditional insurance companies”. More bluntly, a US
respondent said: “Insurance broking is the last big bastion of financial
intermediation in the commercial marketplace, an anomaly since they are nearly
irrelevant to formation of capital”.
Many insurers have reserved for
low long term interest rates so
solvency may not be an issue.
However, in-force business has
been priced to earn a higher yield
over the long-term; hence,
profitability will be affected.
Furthermore, companies are
moving away from long-term
products with embedded
guarantees which may affect
their markets. The overall effect
is fewer benefits at a higher price
which may ultimately cause a
significant decrease in new sales.
Insurance supervisor
‘Bastions of
resistance’ at the
client interface

23.
20 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org
C S F I / New York CSFI
Yet criticism of the insurance industry’s innovation record is nothing new. What has
created fresh urgency is the growing risk that technologically adept new entrants
will take market share from more cumbersome incumbents. The chief executive
officer at an insurance brokerage in South Africa said: “The advantage of
newcomers to the industry is that they are not burdened by legacy systems – the
major source of inhibition by well-established insurance players… [which makes it]
relatively easier and less costly for a newcomer to deploy new and evolving
technology”.
Yet there is also sympathy for insurance companies grappling with obstacles to
innovation. One is regulation, the No.1 risk in this survey: the cost and time
requirements of compliance distracting management from exploring new
distribution channels. Another is the potential for cyber disruption. “Insurance
companies have to have very secure distribution, which makes the pace [of using
new channels] slower”, said a respondent in Finland.
The chief executive officer of a brokerage firm in the UK argued that criticisms
about a lack of innovation in the industry are overblown. “Consultants will tell us
this a major risk, but the reason that there are insurance companies centuries old, is
that they generally can adapt to change”, he said. “Insurers and brokers are
consumers of technology too; they don't leave their experience at the office door, so
there is no excuse for a lack of awareness of these trends”.
The power of technology
A striking theme in this survey is technological change. It underpins three of
this year’s Top Ten Banana Skins: Cyber risk (No. 4), Change management (No.
6), and Distribution channels (No. 8). It is also one of the urgent concerns
behind lower-ranked industry risks such as Human talent (No. 15) and Product
development (No. 17).
New technology can be both a threat and an opportunity. The concern raised
by our survey is that the traditional insurance industry will be slow to grasp the
opportunity and will end up facing a threat. Developments such as digitisation,
the internet and social media are already profoundly influencing price and
demand for insurance products, and the means customers use to interact with
their insurance providers.
As technology advances and markets become less opaque and more
connected, there could even be a reduction in the size of the traditional
business. But there will also be new types of risks, from data security to
nanotechnology and driverless cars. If conventional insurers do not meet these
changes, the risk is that new entrants or “disrupters”, such as the big tech
firms, will edge them out.
As one respondent put it: “Technology advances faster than the traditional
insurers' innovation. Soon, innovative insurers will occupy the position where
the traditional insurers have prevailed.”

24.
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9. Natural catastrophes (5)
This Banana Skin achieved high positions in the last two surveys because they
coincided with the major earthquakes in Japan and New Zealand. This year's Nepal
earthquake occurred half way through the survey and did not, therefore, have a full
impact on responses. However, risk perceptions in this area are heavily influenced
by recent events, which may, or may not, be rational.
They are also influenced by a perceived link to climate change (No. 19) which, it is
feared, will trigger larger and more frequent losses. There were specific warnings
from respondents about more storms and flooding in Europe, and tornados in the
Americas. The managing director of a reinsurance company in Australia warned that
a “concentration of assets in exposed areas amplifies the problem.” At the same
time, “the risks are getting bigger due to global economic expansion and
interdependencies”, said an insurance consultant in the UK.
Alongside this growing threat is a concern that catastrophe risk is being underpriced.
“We saw in events like the NZ and Japanese quakes that the modelling and exposure
management of firms did not match the actual losses”, said one respondent. David
Chan, managing director, Thistle Asia, Jardine Lloyd Thompson Asia in Singapore,
asked: “Do insurers adequately account and price for the potential for claims
'demand surge' following catastrophes?” He pointed out that may add up to 20 per
cent - more in certain circumstances - to the costs of claims following a natural
catastrophe.
Others cautioned against the industry panicking and unduly withdrawing from
markets. A respondent from Canada said that “except when subjected to irrational
regulatory pricing and market conduct”, the industry has evolved the tools to
manage catastrophes. “This is the business we are in”, said the chief financial officer
of a non-life insurance company in Australia. But he added: “It will be interesting to
see how the newer challengers cope with the string of events we have recently
experienced”.
10. Quality of risk management (7)
The management of risk is seen to have improved in the last few years. Many
respondents said that insurance companies had greatly strengthened their
understanding and abilities in this area, and had instilled a stronger risk culture in
their organisations.
However, various concerns persist, for example, about the depth of the commitment
to managing risk. One respondent said that insurance companies "are not really
changing the way we work day-to-day, just on the surface," and another wondered
whether one could talk about a new risk culture or merely another function within
the organisation. There was also a concern about endurance: Edward Sankey,
director at Larocourt Risk in the UK, said that "after some relatively benign years
(political and regulatory events apart) there is a danger of complacency in the face of
some rapidly changing risks." Others said that risk systems would have to stand up
to intense pressures in the market: competition, technological change, low interest
rates.
Catastrophe risk
may be
underpriced given
recent events

25.
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C S F I / New York CSFI
Many respondents gave credit to better
regulation for the improvement in risk
management. A reinsurer in Bermuda said
"New solvency regimes should make this
less of a risk (otherwise what is the point
of having them!)". Agustin Enrich,
director general of MGS Insurance and
Reinsurance in Spain, said: “I think that
Solvency 2 helps us be aware of the risks
in each and every one of our strategic
business decisions”.
Some respondents were less charitable
about the regulator, saying that initiatives
like Solvency 2 clogged the system with
bureaucracy and required insurers to hold
levels of capital which threatened their
profitability, neither of which was good for risk management. A Belgian company
director said that "risk management has got a maximum of attention over the last
years, but some aspects of regulation may have taken too much priority."
11. Business practices (4)
Questionable business practices have receded as a concern, most likely because the
incidence of mis-selling has declined with tougher regulation and higher industry
awareness. The chief risk officer at a Swiss reinsurer said that “enforcement of
actual or perceived mis-selling practice has become more aggressive.” But the tone
of the responses here could be summed up in the question: "Has it really gone
away?"
The chairman of a UK life company said that it was "an ever present risk", with the
recent changes in the UK annuity market opening up opportunities for mis-selling
new savings products. A US actuary said that while some markets had improved,
"there are areas of the world where it is still the Wild West". There are also legacy
issues surrounding products which were sold in a previous and more lax regulatory
regime.
Some respondents feared that the current market environment, with rising
competition, pressure on prices and high regulatory costs would drive insurance
companies to take on fresh risks in this area. As a South African broker put it:
"There are more horses drinking from a shrinking trough". Although mis-selling was
mentioned as the most prevalent bad business practice, other areas of concern
included opaque policy terms and claims handling, which one respondent described
as "often undervalued in this context". Tania Charles, an insurance risk consultant in
New Zealand, said that insurers there had still not settled all claims four years after
the Canterbury earthquake, with consequent damage to their reputations.
The industry is facing some huge
challenges, and risk teams and
management are not able to
dedicate sufficient time to
analysing and addressing key
business risks. A knock-on impact
is, at a time when risk
management is critical, risk
functions are in danger of losing
credibility with business functions
and the board by focussing so
much on regulatory compliance.
Risk manager
Lloyd’s of London
Is mis-selling back
under control?

26.
C S F I / New York CSFI
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12. Quality of management (8)
Concern about the quality of management in insurance companies seems to be
easing. This was a major issue in earlier years when the industry was seen to be
worryingly short on management talent. The improvement follows on from the
strengthening of governance at the board level (see No. 21) and closer regulation of
the sector.
However there are still aspects of management that are open to risk. The biggest is
the sheer size of the task: the challenges facing insurance industry leaders are
multiplying - and growing in scale. Technology, regulation, structural change,
complexity - insurance executives have to be on top of all these. "It's difficult to
manage the fast new game changers" said an insurance consultant.
The question is whether the industry can find managers of sufficient calibre to deal
with them. Some were doubtful: "The industry does not attract the talent that
produces good leaders" said a company vice-president in Canada. Some respondents
also commented that good underwriters did not necessarily make good managers.
A US respondent said that companies were dumbing management down by
transferring responsibility "from experienced professionals in the major economic
centres to cheaper personnel in non-major economic centres in the US and
outsourcing work overseas." (See also Human talent No. 15).
But the overall tone of the responses in this section was more positive: management
is improving, albeit unevenly, and scrutiny of its performance is stronger than ever.
A senior Canadian insurance executive said that the regulators "will not let
management slide as they may have in past".
13. Market conditions (-)
We introduced this Banana Skin this year to rank concerns about prolonged soft
markets and their impact on profitability. Specifically, we asked whether the
insurance cycle could result in poor market conditions for an extended period of
time. The mid-table ranking of this risk suggests it is on respondents’ minds, notably
in the reinsurance sector where it topped the list, and North America where it was
No. 6.
Concerns centre principally on excess capacity (see No. 22 Capital availability)
and the pressure this is putting on insurers’ margins. The chief financial officer of a
non-life insurance company in New Zealand said: “New competitors and a surplus
of capital will support a soft market for some time. Therefore traditional insurers
will need to continually look at operational efficiencies”.
The capacity being created by new sources of capital such as hedge funds, which
have focused increasingly on insurance linked securities (ILS), is providing
additional liquidity to the market. “Low returns available on conventional
investments have driven the interest for hedge funds and pension funds to invest in
catastrophe risk, leading in turn to soft market conditions”, said a respondent in the
UK. There were questions about how long this trend can last. Chris Wing, Asia
Pacific chief financial officer of SCOR in Singapore, said: “I think that the rise of
Quality of
insurance
management is
seen to be
improving

27.
24 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org
C S F I / New York CSFI
ILS will ultimately plateau as soon as a material or series of material losses hit
investors and the underlying risk/reward profile is clearer”.
For many, the key risk is what happens when the cycle turns. “The danger is that the
longer the market spends in the doldrums the worse the storm when the cycle does
change”, warned a respondent from the broking sector in the UK. The chief
investment officer of a life insurance firm in Japan said: “Risk premiums are falling.
Insurers are increasing risk to stretch for yield. This is the typical ‘pro-cyclical’
behaviour which happens before a market meltdown. Insurance companies will
struggle to maintain discipline during this phase of the economic cycle. It's unclear
what the nature of the next financial crisis will be”.
Some respondents, however, wondered whether past insurance cycles were a good
guide for things to come. “There are currently factors at play that are new, so it is
hard to predict whether the conventional cycle will prevail,” said a reinsurance
respondent in New Zealand, while the chief executive of a non-life insurer in
Canada said: “I think greater sophistication in product pricing and segmentation will
contribute to dampening the hard/soft cycles that have plagued this industry”. The
point was also made that the need for insurance products will continue to increase
with aging populations around the world and growing emerging economies.
14. Long tail liabilities (9)
Although concern about risks which take a long time to materialise seems to be
easing, this remains a difficult area marked by uncertainty about claims and
litigation, as well as the complexities of accounting and regulation.
The days of burgeoning asbestos claims may have passed, but insurers are
constantly on the look-out for risks that might have a similar tendency to grow long
tails. A respondent from France said: “Who knows what the next asbestosis or
industrial disease or deafness or sexual abuse type injury will be? All that is for sure
is that these will materialise and that the plaintiff end of the legal profession will
have a field day.” Other respondents agreed that long tail liabilities will always be
around: it’s a matter of spotting them amidst changing trends, and taking appropriate
action. These are "unknown unknowns", said one of them.
A number made the point that insurers have considerable experience of long tail risk
and should be in a position to deal with it.
A South African broker said: “One would
assume that lessons have been learned
from historic long tail liability exposures
such as asbestosis, tobacco, power line
radiation and the like."
However, a number also raised questions
about the management of these liabilities.
One said that “an overly tolerant accounting regime fuels the fire”, another saw the
greatest risk in American litigiousness, and a third said that regulatory insistence on
early provisioning tended to shut off potentially better ways of dealing with the
problem. One example that was given of legal uncertainty was the 2014 Sentencing
Amendment Act in New Zealand which has extended the ability of the New Zealand
courts to award compensation for losses suffered as a result of personal injury.
Managers who leave the
"problem" to the next generation
of managers are not "leaders" and
are considered the root of the
future crises in certain companies.
Swiss life insurance executive
Plagued by
surplus capacity

28.
C S F I / New York CSFI
CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 25
15. Human talent (19)
Concern about the ability of the insurance industry to attract good talent is ever
present in the Banana Skins survey, and is closely linked to the quality of
management in the industry (see No. 12). This year, responses showed some striking
geographic variances: the Far East Pacific region had this risk at No. 4 and Africa at
No. 5. But in Europe and the Middle East Asia region it was among the bottom few.
For some respondents, the global financial crisis improved the insurance industry’s
standing as a career destination compared to other financial services. But there is
still a feeling that it is seen as banking’s unsexy cousin – particularly in economies
where employment levels are rising and graduates can afford to be more choosy.
One respondent in the US said: “Insurance has long trailed banking, consulting and
the learned professions in attracting talent. That is already taking a toll and there is
little sign that the industry is keeping pace.”
But there are other disincentives for executive talent. The chief financial officer of a
non-life insurance firm in South Africa warned: “The overzealous regulatory
intervention is creating an unattractive business environment and insurance
executives may well find other industries easier and more attractive”. A shortage at
senior levels is a particular concern in less developed markets: “Experience is and
will continue to be lacking for the next 10 years in emerging countries where the
insurance market grows faster than the employee supply”, said a broker in Vietnam.
Respondents also pointed to talent shortages in more technical areas: underwriting,
IT, actuarial, legal and compliance.
But in Europe, where this risk came No. 22, many respondents were more sanguine.
“Competition for the best professional profiles has always been high. The insurance
sector offers great challenges and opportunities for its complexity and the need for
adaptation”, said the director-general of a credit insurance company in Spain.
16. Political interference (10)
The risk of political interference in the insurance industry is seen to be receding as
the tension created by the financial crisis eases. A prominent theme in our previous
survey was that insurers were being unjustly "bashed" like banks and subjected to
politically driven controls. Concern about excessive regulation still tops the
rankings, but there is less willingness to ascribe it to political motives. Many
respondents said that political interference was not a problem, though levels vary
greatly from one jurisdiction to another.
Where it was a problem, it usually took the form of government intervention to set
terms in the name of consumer protection. A respondent from Canada said that
"populist views rather than facts" were driving political interference in product
design and pricing, with auto insurance in Ontario a long-running bugbear. Another
from France said that "politicians are trying to force the insurance industry to pick
up the tab for global warming, buildings on flood plains etc.", and another from
Spain reported that "there has been much political interference in the industry
beyond regulatory pressure". Another point of interference was on investment: a
Finnish life actuary said that “the current situation pressures the life sector to fund
European sovereigns in a low interest rate environment which would not have
Concern about
industry ability to
attract good
people

29.
26 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org
C S F I / New York CSFI
happened under S1 regulation”, and an actuary in Argentina reported that life
companies were required to invest one fifth of their portfolio in “regulated assets”.
Political risk is particularly strong in areas linked to public welfare, such as pensions
and health, an issue described in more detail in No. 20 Social change.
17. Product development (20)
While the risk that insurers fail to develop the right products for their customers is
not seen as urgent, it is rising from a low position. It is ranked higher in Europe (at
No. 12) than the rest of the world – especially in the UK, where it came No. 5.
The typical concern is that markets are changing and insurers are not adapting fast
enough. Damien Wood, assistant underwriter at UK non-life firm Giant, warned: “A
lack of innovation is leading to an inability to provide effective yet profitable
solutions for risks arising from new technologies (i.e. emerging cyber risks, drones,
driverless cars, 3D printing, etc.)”. A non-life respondent from Canada said: “We
need to evolve to earn the right to keep our customers”.
The risk is that the industry is producing products driven by supply rather than
demand, which leaves the door open for nimble new entrants to catch established
players off guard and disrupt the market. This is seen as both a threat and an
opportunity. A consultant to the insurance broking sector in the US said:
“Opportunistic capitalism has served our industry well. Newly discovered exposures
such as cyber, EPLI [Employment Practices Liability] and alternative energy have
all led to the proliferation of new products. I expect this trend to continue”.
But some respondents urged caution. The former chief executive officer of a life
insurance company in Switzerland said: “We should not over-estimate the ‘product
development’ hype. It is true that certain products can be adapted and tailored a bit
here and there. But the basic mechanics do not change. Customers need clarity about
the functioning of their products in case of ‘damage’. This is the real need to be
serviced”. In the US, a respondent said it was “more likely insurers will develop
products that are poorly priced than they will miss a chance at offering ways to
attract money”.
Regulation is seen to be having a significant impact in this area, some thought, by
making it more difficult for the industry to meet customer needs. Speaking about the
When the lights go out
The ongoing electricity constraints expose our customers to the risk of
business interruption, supply chain disruption, stock degradation, security
issues and many related risks. In the least it causes an increase in operating
costs. A total grid failure (assuming a black start, recovery would take no less
than three weeks) would result in catastrophic claims, impacting both non-life
insurers and reinsurers. Political instability, lacklustre economic growth,
weakening pressure on emerging market currencies and a potential SA re-
rating will all make for challenging trading conditions. These are major risks
with causal factors largely out of the hands of corporate SA.
Chief risk officer
South African insurance group
Are insurers
adapting fast
enough to a
changing market?

30.
C S F I / New York CSFI
CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 27
UK, a retired actuary said: “The current spate of pensions regulation could make it
impossible for insurers to provide the right products when dumb government
regulation encourages people to do very silly things with their pension pots. In a
decade or so, this will come back to haunt the government(s) of the day.”
18. Reputation (14)
Concerns about the reputation of the industry have eased somewhat since the last
survey, for a number of reasons. The mis-selling scandals are slipping into the past,
the banks are taking most of the flak for the financial crisis, and the industry itself is
becoming more pro-active about polishing its image.
On the other hand, the job is far from done, and new developments like social media
make reputational risk much harder to manage. Jacqui Thompson, head of finance
risk and compliance at AA Insurance in New Zealand, said “This continues to be a
major area of risk which is largely uncontrollable. The key is how to respond.”
Perceptions of the scale of this risk varied widely, from countries like the UK and
the Netherlands where there have been massive scandals to others like Spain and
Mexico where respondents scored this as a low risk.
Many respondents argued that insurance has generally been held in low regard, and
that the only way, therefore, must be up. A non-executive director at a UK non-life
company said: "It is not a loved industry and therefore easy to damage the
reputation". Much of this damage is self-inflicted, by bad conduct and poor public
relations. A US broker said: "It is ever thus! As an industry, we continually shoot
ourselves in the foot/feet, and television ads that treat insurance as a commodity
exacerbate our collective reputation.” Rick Murray, a US insurance consultant, said
that "the industry invites disdain by its tendency to manage by looking in the mirror
rather than out the window."
Some respondents raised the issue of trust and transparency: consumers were now
wary of dealing with the industry, and this could weaken the franchise (see box).
The vice-president of a Canadian non-life company said that “Overall, we need to
improve the trust of our customers. We do care and want to provide great customer
experience including fair claims payments.”
The growth of social media could affect all this - for good or bad depending on the
news that gets amplified. A respondent from Malaysia said that "pervasiveness via
social media in a short time frame has made the industry very vulnerable.” The
ability of insurance companies to respond to social media was seen as critical, and
some respondents made the point that media comments provided valuable insights
into how companies were perceived.
Social media are
making reputation
management
harder

31.
28 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org
C S F I / New York CSFI
19. Climate change (18)
Climate change continues to be seen as a low order risk to the insurance industry
overall. But its low position conceals a deep division of opinion among respondents.
About as many gave this Banana Skin the maximum severity rating as gave it the
minimum rating. This divide can partly be explained by the sector breakdown: there
was much more anxiety among non-life insurers (who ranked it No. 9) than life
insurers (No. 23).
Another reason is that the impact of climate change on the industry is seen to vary
widely depending on how far you look forward. “In the longer term, this is probably
the greatest risk”, said the chief financial officer of a non-life company in France,
while a consultant in the UK said the risk was: “Long term – massive; medium term
– potentially significant in terms of increased frequency of large losses”. Threats
that were highlighted included coastal and tidal floods from rising sea levels, more
intense thunderstorms, and the effect of changing climates on agricultural-based
economies.
But it also means the industry still has time to prepare for the worst consequences of
climate change. The chief executive of a non-life company in Canada said:
“Provided companies have the will, they can mitigate [the threat] through better risk
segmentation and pricing”. An actuary in Bermuda, who called for the industry to
take the lead in highlighting the “huge” risks it faced, nonetheless said: “Climate
change ‘on average’ can be priced in, and increased volatility can be included in
pricing and thus be covered”. A repeated point was that non-life insurers are
typically able to change their premiums annually. “Climate change, although
accelerating, is happening much more slowly than this”, a UK actuary pointed out.
Who needs insurance?
One of the fears that keeps insurers awake at night is that people may stop
buying insurance – a product that has always been described as sold, not
bought. Mis-selling scandals have severely damaged trust in the industry,
raising questions about the value it offers, and whether people really need
what one respondent described as “a grudge purchase”.
The uncertain economic situation has also caused a rise in lapse and
cancellation rates and with them a view among consumers that they can
manage by self-or under-insuring, as commercial companies have been doing
for years.
A Dutch insurance director feared "the loss of interest of customers in
insurance solutions ", while in New Zealand, a respondent worried that the
rising cost of insurance - because of increasing regulation - would result in
unintended consequences "such as higher levels of under-insurance". A South
African respondent said one of the biggest challenges facing the industry was
“developing compelling insurance propositions for potential customers at a
time when demand for instant gratification and tangible benefits dominates.”
Industry divided
over the impact of
climate change

32.
C S F I / New York CSFI
CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 29
Yet there is a fear that sophisticated pricing techniques which price certain risks
associated with climate change out of the market could lead to reputational damage
or even a public policy backlash.
20. Social change (-)
Societies are changing: population structures, social services, financial planning.
Many of these changes are occurring in areas of direct interest to the insurance
industry, so we decided, for the first time in this survey series, to seek insurers'
views on the risks involved.
The fact that this Banana Skin came relatively low on the scale suggests that
whatever risks there are, are not seen to be very pressing. However this is a complex
area because of its proximity to matters of considerable public interest like health
care and pensions, and the key risks mentioned by respondents reflected this fact.
Many started by saying that insurers were in the business of pooling risk, not
supplying social services. And where they did supply products that met social needs,
these had to be on a commercial basis. That said, many saw this as an area ripe with
opportunity to innovate – and add lustre to the industry’s reputation. An insurance
consultant in France said that insurers “have always proven that they can reinvent
themselves and propose new relevant offerings. Also there is no alternative as the
public sector has given up in every country on this front”.
The risks essentially come down to the nature of the industry's relationship with the
public sector: the official providers, the regulators and the policymakers. The head
of planning and strategy at a large life company in Singapore said that “the risk and
public expectations are high to begin with, but it has to be a public-private
partnership that will enable governments and insurers to tackle the challenges
together. It can't be done by insurers alone.”
A US broker said: "Assuming insurers are allowed to charge actuarially 'appropriate'
prices, products will be developed and available. However, absent the ability to
make a fair underwriting profit, new products may not be developed and the
availability of some products may be limited." Quite what happens then is a matter
of conjecture. Political pressure? An insurance consultant in the Netherlands said:
"These are society-wide issues that do not have a simple solution, but where society
may 'force' insurers to find a solution.” Many respondents cited regulatory or
political obstacles to providing the right products: high capital requirements, tough
health insurance rules, a ban on gender and age considerations in setting premiums,
[Social change] offers both a major opportunity and a threat to insurers. The
state requires both help and innovation to address these issues. The business
opportunities are considerable but the sector needs to learn the lesson from
the past and overcome the poor public reputation from previous mis-selling
events. The insurance profession must lead the way by creating propositions
that are consumer centric and meet the public’s future needs and help manage
their risks.
David Thomson, director, policy and public affairs, Chartered Insurance
Institute, UK
A threat and an
opportunity

33.
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C S F I / New York CSFI
and, as recently occurred in the UK, the removal of compulsory annuitisation as part
of sweeping pensions reforms.
A UK respondent said "The risk is that insurers will fail by withdrawing from these
markets due to an inability to develop value adding products for their customers.”
But others were more optimistic. One said: "I think the public understands the risk
companies run and that impossible things cannot be asked of insurance companies."
21. Corporate governance (17)
Concern about the quality of corporate governance in the insurance sector is fading.
Four years ago, at the height of the financial and mis-selling crises, this Banana Skin
ranked No. 8. After falling in the last survey, it has fallen another four places this
year.
Most of our respondents spoke positively of the quality of insurance company
governance. A risk officer from the UK said that “boards are getting more
professional", from South Africa: "Insurers generally have good boards", and from
Canada: "Boards are more astute and engaged than ever." One respondent said that
problems were “far less likely than with the banks, which are often too large to
manage.”
Where comments were negative they tended to be about the poor choice of board
members and lingering cronyism. Andreas Bachofner, director of Shires Partnership
in the UK, said: "Many board members stay on for too long. There should frequently
be new board members to bring in different ideas from a different background. The
old boys' network is a model of the past."
Respondents ascribed much of the improvement to closer regulatory scrutiny and the
introduction of Solvency 2. Des Thomas, chief risk officer and actuary at MetLife in
Japan, said that "requirements on board members have been strengthened in many
countries". However the chairman of another life company was more sceptical: "If
the regulators make key roles unattractive and talent goes elsewhere, the risk is
high."
Concern on this front was strongest in emerging markets where progress has been
slower. For example, it ranked Middle East (No. 13), Africa (No. 16) and Latin
America (No. 18) (where one respondent described standards as "precarious")
versus Europe (No. 21) and North America (No. 22).
22. Capital availability (16)
Four years ago this Banana Skin was ranked No. 2 amid urgent concerns about
capital shortages with the impending requirements of the EU’s Solvency 2
Directive. Now the risk has been turned on its head.
Due to low interest rates and soft market conditions, the problem is a surfeit of
capital creating intense competition, particularly in reinsurance. A respondent from
New Zealand said: “The current oversupply will put real pressure on profitability. It
will also create an expectation of supply that may not be matched in the event of a
global or significant local event”.
Insurance
companies are
seen to be
better run

34.
C S F I / New York CSFI
CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 31
The danger is that this situation will press insurers to take extra risks to meet their
return targets. An analyst at a non-life insurance company in the UK warned: “Too
high dependency on capital is dangerous. We need to go back to basics: run a pool
based on risk exposure and losses, not based on availability of capital”.
The impact of regulation adds to the uncertainty. One insurance consultant said of
Europe: “The real issue in the life side is that no-one knows what the impact of
Solvency 2 is on capital levels”. Others warned that consolidation of the market
resulting from changing regulation could concentrate capital in the hands of the
largest insurers.
The emergence of “new” types of
alternative capital will require traditional
firms to reinvent themselves to remain
relevant – rather than, as one respondent in
the US put it bluntly, maintaining “a
narcissistic self-deception that the
traditional insurance model of risk transfer
owns the space”.
Several respondents questioned how long the current situation can last. “Over-
capitalisation is prolonging the soft market to the point of unsustainability”, said the
executive director at one brokerage in the UK. On the other hand, Solvency 2
requirements could exhaust the surplus quite quickly.
23. Terrorism (27)
Though it has risen off the bottom of these rankings, terrorism continues to be seen
as a low order underwriting risk.
While many saw the likelihood of terrorist attacks around the world increasing –
particularly in the Middle East and parts of Africa – their impact as an underwriting
risk for the insurance industry was generally downplayed. A repeated point was that
such events are often excluded from policies. “In our market the Insurance
Compensation Consortium limits risk”, said a non-life respondent from Spain. A
respondent in India called the risk “moderate and manageable”; another in the UK
said it is “not an industry-threatening issue”.
A few respondents did voice more serious concerns. There is “lots of naïve
underwriting” going on, said the chief risk officer of a non-life insurance firm in the
UK, while Ed Berko, chief risk officer at The Economical Insurance Group in
Canada, said: “This is an evolving and increasing risk that poses a significant threat
to life and non-life insurers”.
Seen as more serious than the underwriting risk, however, was the possibility that
the financial services sector as a whole could become a target for terrorism to
destabilise financial markets. The likelihood of an attack getting through has been
amplified by cyber-terrorism. A reinsurance respondent from Spain warned the
threat was not of a “classic” attack, but rather “cyber attacks to bring down
information systems in the near future”.
Lots of capital continues to see
the insurance market as
attractive, despite those in the
market viewing it less favourably.
Director, actuarial
German non-life company
Too much capital
now, but S2 can
change that

35.
32 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org
C S F I / New York CSFI
24. Pollution/contamination (26)
This is the lowest ranked of the major underwriting risks: it does not appear inside
the top 20 in any of the regions or sub-sectors we surveyed, which is in line with the
past record.
The reason is that pollution and contamination is generally seen as a localised risk:
higher for certain product providers but not a systemic issue. Many respondents
pointed out that coverage in the industry is typically limited. “Even a large pandemic
would moderately affect our P&L”, said the chief risk officer of an insurance group
in Belgium.
Yet some saw this as a more serious problem than it might seem on the surface. The
chief executive of a health insurance company in Australia admitted: “To the extent
that chronic disease can occur many years after exposure, we do not yet know our
claims potential. It is likely to increase though”. In South Africa, one respondent
said: “There are generally hidden long tail liability issues where the potential
exposure is already known by a few but the ultimate impact is knowingly or
unknowingly not divulged”.
Emerging technologies could also bring a new dimension to this risk. A UK risk
officer said it was becoming: “a more challenging area as new materials and
technologies are being put in place - i.e. nanotechnology and complex waste
disposal issues, mining, etc.”
25. Complex instruments (23)
This year’s lowest rated Banana Skin has fallen sharply since coming No. 8 in 2009
with the crisis at AIG. The general view is that the industry has learned its lesson
and that insurers’ exposure to derivatives and exotic products is low.
Many pointed out that regulatory oversight in this area remains especially stringent.
“New clearing and collateral requirements will make derivatives significantly more
expensive”, said one respondent from the UK. An actuary in Argentina noted: “In
many countries, particularly emerging or frontier ones, [complex instruments] are
strictly forbidden”.
Yet some responses urged vigilance. Insurers generally tend to use derivatives for
hedging purposes rather than speculation, but there were fears that complex
instruments are still poorly understood. “Hedging products can often be effective but
should never be considered a complete risk elimination tool”, said an underwriter in
the UK. The danger lies in short memories and complacency. “Hope has already
threatened prudence”, warned one US consultant.
Another reason not to take this risk lightly is that low interest rates are increasing
incentives to chase higher returns through other asset classes. “Insurers which are
desperate for investment income may seek these instruments and get them wrong,”
said Peter Harris, managing director of CBL Insurance in New Zealand. “It comes
down to some insurers which have a lack of underwriting profits risking a desperate
drive to derive investment income to make up for it”.
A localised risk
Painful lessons
learnt

36.
C S F I / New York CSFI
CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 33
Insurance Banana Skins: The Top Ten since 2007
2007 2009 2011
1 Too much regulation 1 Investment performance 1 Regulation
2 Natural catastrophes 2 Equity markets 2 Capital
3 Management quality 3 Capital availability 3 Macro-economic trends
4 Climate change 4 Macro-economic trends 4 Investment performance
5 Managing the cycle 5 Too much regulation 5 Natural catastrophes
6 Distribution channels 6 Risk management 6 Talent
7 Long tail liabilities 7 Reinsurance security 7 Long tail liabilities
8 Actuarial assumptions 8 Complex instruments 8 Corporate governance
9 Longevity assumptions 9 Actuarial assumptions 9 Distribution channels
10 New types of competitors 10 Long tail liabilities 10 Interest rates
2013 2015
1 Regulation 1 Regulation
2 Investment performance 2 Macro-economy
3 Macro-economic 3 Interest rates
4 Business practices 4 Cyber risk
5 Natural catastrophes 5 Investment performance
6 Guaranteed products 6 Change management
7 Quality of risk 7 Guaranteed products
8 Quality of management 8 Distribution channels
9 Long tail liabilities 9 Natural catastrophes
10 Political interference 10 Quality of risk management
Some risks come and go; some are hardy perennials, as this chart of the Top Ten Banana Skins since
2007 shows.
The strongest contender by far is regulation which topped the first survey in 2007 and three of the
four succeeding surveys in 2011, 2013 and 2015. The only year it slipped down the rankings was
2009 when more pressing concerns about the global financial crisis occupied people’s minds. The
reasons for its strong showing have remained constant: too much and too expensive. Another strong
contender is investment performance which burst into No. 1 position during the crisis in 2009 and
has remained in the top five ever since, though the reasons have shifted. Initially it was driven by
losses from the market crash; now the concerns are about the persistence of low yields. Hence, too,
the appearance of interest rate risk at No. 3 this year. Concern about the macro-economic situation
has shown a similar pattern.
Among industry risks, the quality of governance and management started high but have gradually
slipped down the list until they disappeared out of the Top Ten for the first time this year, reflecting
the view that insurance companies are now better run. Among underwriting risks, natural
catastrophes have always loomed large, though in an up and down pattern shaped by recent events.
Concern about climate change, by contrast, slipped from No. 4 in 2007 and has never reappeared in
the Top Ten.
The new risks to watch are cyber, which appeared dramatically at No. 4 this year and has yet to be
fully scoped, and change management (No. 6) as the industry grapples with the forces of the new.